An exchange-traded fund (ETF) or, more generally, an exchange traded product (ETP), is an investment fund that is traded on stock exchanges, electronic communication networks (ECNs), and/or alternative trading systems (ATS). Most ETPs track an index, such as the S&P 500. More generally, an ETP holds assets (e.g., stocks, bonds, commodities) and is designed to trade at approximately the same price as the net asset value of these underlying assets over the course of the trading day.
An advantage of an ETP is that it combines the diversified holdings of a mutual fund, which can be bought or sold only at the end of each trading day for its net asset value, with the ability to trade throughout the trading day at prices that track the net asset value.
Over time, new types of ETPs have been developed. These include leveraged and reverse ETPs which promise investors returns that are multiples of the index return or are returns that are the negative of the index returns. Leveraged and reverse ETPs can either be daily or monthly. The daily ETPs target a specified multiple of the daily return of the underlying instrument and the monthly ETPs target a specified multiple of the monthly return of the underlying instrument. However, these ETPs may not, in fact, track the specified multiple of the index performance over a period of time.